Facebook, Groupon not likely facing IPO pressure

Both companies have plenty of fund-raising flexibility, expert says

DanGallagher

JohnLetzing

SAN FRANCISCO (MarketWatch) — News that Facebook Inc. and Groupon Inc. have both raised significant sums of money from investors may suggest that neither is planning to go public this year.

At least one IPO expert believes the two companies are unlikely to consider any sort of public offering before 2012. That’s because both are considered top-notch draws for investors. Facebook has raised a fresh $500 million from Goldman Sachs Group Inc. and Digital Sky Technologies, according to reports Monday.

Last week, Groupon made a filing with the Securities and Exchange Commission disclosing that it too has raised $500 million as part of a $1 billion funding round. Read full story on Groupon funding.

“Facebook is in an enviable position in that investors are willing to throw money at them at any time,” Paul Bard, IPO analyst and vice president of Renaissance Capital, said in an interview Monday.

Bard added that the recent funding round will not “meaningfully change” Facebook’s IPO plans. The company itself has been very cagey about its plans, with Chief Executive Mark Zuckerberg downplaying any chance for a near-term deal in various media interviews and trade-show appearances.

“We believe Facebook is likely to file for an IPO by the end of 2011, which would set them up for an IPO sometime in early 2012,” Bard said.

Both Facebook and Groupon are part of a small list of “highly anticipated private companies that investors would love to get their hands on,” Bard said. Others include business social-networking site LinkedIn, social game maker Zynga and online-dating site eHarmony.

“Investors have been increasingly craving growth and that has been demonstrated by the performance of the IPO market in 2010 — with virtually all of the top performers being small-cap growth companies,” Bard said.

SEC probing secondary markets

By remaining private, despite its rapid growth, Facebook has been granted an ability to delve into new areas and experiment with new advertising formats, without the pressure of public shareholders scrutinizing the results of those endeavors in regular financial disclosures.

However, some investors have become increasingly able to purchase shares in Facebook and other private firms thanks to secondary markets, and relatively new forums such as SecondMarket and SharesPost.

On SharesPost, for example, which bills itself as a “passive bulletin board,” potential buyers have been seeking Facebook shares in recent days for between $40 and $50 apiece.

Last week, reports surfaced that the Securities and Exchange Commission is probing secondary-market trading in shares of private firms such as Facebook.

According to reports, the probe is related in part to whether such trading is enabling companies to avoid SEC public financial disclosure requirements for firms with over 500 shareholders. An SEC spokesman declined to comment.

SecondMarket spokesman Mark Murphy confirmed that the company has received a request for information from the SEC, which is related to “Pre-IPO Pooled Investment Funds.”

“We are fully cooperating with the SEC in this inquiry,” Murphy said.

According to the reported terms of the new investment from Goldman Sachs and others in Facebook, Goldman will create a special vehicle capable of drawing in multiple investors interested in owning chunks of the social-networking service, even as the vehicle would be officially counted as a single investor.

“It seems like they’re trying to structure this transaction where they can stay within the 500 shareholder limit to avoid the registration requirements,” said Todd Wyche, managing director of boutique investment bank Brinson Patrick.

Still, Wyche added, “they’re going to have a challenge in staying private.”

Exemption

In late 2008, Facebook applied for and received an exemption from the SEC’s 500-investor rule for public disclosures, as it relates to the company’s restricted stock units.

It’s unclear whether or not the company has applied for, or received any other related exemptions. A Facebook spokesman declined to comment.

Only high-profile companies like Facebook and Groupon have the ability to draw in large amounts of private capital, enabling investors and founders to cash out while still avoiding an IPO.

Overall, however, 2010 saw an improvement in the market for venture capital-backed IPOs. According to a report from Dow Jones VentureSource on Monday, 46 venture-backed companies raised $3.4 billion last year — compared with eight deals that raised $903 million in 2009.

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